The challenge I have with the GameStop action is not the inefficiency of markets or the lopsided short positions, which fueled the upside. My challenge is not with the Reddit threads or Robin Hood traders. Nope, the biggest problem I have with the GameStop type action we’ve seen of late is the carrot of easy riches it flashes to onlookers…the smooth seduction of wealth, with the mere press of a button or a swipe of the finger. While it is this very temptation that brings many to the markets and helps provide liquidity and opportunity, focusing on the rags to riches anomalies can be absolutely deadly.
Over a year ago now, Keith ”the Roaring Kitty” Gill began making his case for a long side, value based trade in GameStop (GME). Around the same time, and possibly an influence on Keith, hedge fund manager Michael Burry, famous for being the trader who made billions in the scenario featured in the movie ‘The Big Short’, had taken a position under a similar thesis and let his partners know of his position.
While all have seen the millions made from the jaw dropping short squeeze, what few fail to recognize is either the exceptional amount of time it took for this thesis to play out or the countless other ideas that traders develop that never work out, fade into the abyss and are never to be mentioned again. But alas, in this instance the GameStop trade not only worked but in such a manner as to make the individual incredibly wealthy and capture the world’s attention almost overnight.
In America we root for the underdog, we celebrate the anomalies and if we can feel like we are ‘sticking it to the Wall Street suits’ in the process, all the better. In my opinion, this is no different than the story everyone has of that friend of a friend who hit the jackpot at a casino in Vegas or the Trifecta at Keeneland or maybe even the friend of a friend who knows a lotto winner. While these stories make great table talk, rarely if ever do we hear about those who perpetually feed their checks into the one-armed bandit, spend thousands over a period of years to no avail in the lotto or the countless folks who walk away from Vegas owing more than they can afford to pay.
Now, make no mistake, I am a big fan of the ideas of great personal success over a long period of time, exceptional work ethic, good fortune and a Cinderella ending . As a parent of three boys I’m constantly preaching the unbelievable possibilities that hard work, determination and solid goals may yield and I never support the idea of a short cut or any method by which the odds of success fall far outside the normal realm of probability.
I have been a market participant in some form or fashion for 30 years. I’ve talked on countless occasions about my first stock held in McDonalds at the age of 12 and my dorm-room trading during the dot-com frenzy of the ‘90s. When I began managing money, I utilized a deep value, all stock approach and spent two years trading long/short equity at a hedge fund. At present, we manage over $200MM, developing customized portfolios based on asset allocation, index ETFs with a macro, technical and fundamental blend. To say I’ve been around the block is an understatement and through it all I can say unequivocally I have learned there are absolutely NO shortcuts.
In fact, not only are there no shortcuts, but I have often seen folks who are batting for homeruns and grand slams succumb to the pitfalls of investment folly. Over the years I’ve watched MLPs blow up, High Yield Debt implode, Dow blue chips fall into the abyss, household names file for bankruptcy, high profile stock gurus come and go, yet through it all the major indices such as the S&P 500 just keep chugging right along yielding incredible returns. In fact, just the other day I was running a mock portfolio for someone comparing the Total Stock Market index to an annuity quote they received. The annuity provider modeled the American Funds Growth and Income Fund from 1990 through 2020 (which I thought was quite humorous by the way), but to compare apples to apples, I relayed what an investment in the Total Stock Market would have done through this same time period. The annuity, which would end up netting $0.00 at the end of the individual’s life, was vastly different than the $12,000,000 from a simple broad based index fund. Nope, that’s not a typo and I included the actual data below.
The point I’m trying to make is simple. Investing should be boring and consistent. Sure, it’s fun to read about the one hit wonders, but the reality is that following such a path is fools gold and not something you should even begin to consider if you’re looking at building, preserving or distributing wealth over your lifetime.
Have you ever wondered why Warren Buffett, widely recognized as the worlds most famous and successful investor, has not dipped a toe into Bitcoin? Do you think he’s on the Gamestop train? How about the Annuity wagon? Nope, Buffett recently made headlines adding capital into two of the stodgiest names out there, Chevron (CVX) and Verizon (VZ). Forget the fact that Chevron pays a 5% dividend while Verizon pays 4%. I doubt they’ll bring anyone on CNBC more than once (Yours Truly HERE) to discuss how ‘exciting’ these stocks are. Nope, the Oracle of Omaha isn’t concerned with what’s the hot mover now, instead he’s more concerned with compounding capital over time, even if that does mean buying a stodgy dividend play while the rest of the world seems hopped up on speed.
I’m all for free markets and while I don’t agree with any government agency, or company for that matter, stepping into the markets to try and ‘protect’ people from themselves, what I don’t like is that the allure of these anomalies will ultimately hurt many people. With an eye on quick money, they will enter the markets, eventually lose their hard-earned capital and never return. Most will come and go from the market leaving with a terrible taste in their mouth, never experiencing the vast amount opportunity that favors the prudent and patient.
In our firm we will always favor the boring. We will always stick with the methods that have made us who we are and provided peace of mind for our clients throughout both calm and turbulent waters. If you find yourself itching for a fast ride, may I encourage a quick trip to Vegas where at least you’ll be provided free drinks while you deposit your money into the vast cavern of unrealistic expectations.